Captive Health Insurance Companies: A Guide to Formation and Benefits

Captive health insurance companies are a type of insurance company that is owned and controlled by a single entity, such as a business or organization.

A captive health insurance company is formed by a parent company to provide insurance coverage to its employees, and is typically used by companies with a large workforce or those in high-risk industries.

Captive health insurance companies are often more cost-effective than traditional insurance companies, as they can negotiate better rates with healthcare providers and reduce administrative costs.

By forming a captive health insurance company, businesses can also gain more control over their healthcare costs and make more informed decisions about their benefits offerings.

Related reading: Types of Captive Insurance

A captive insurance company is a form of corporate self-insurance, allowing companies to take control of their insurance needs. It's a separate entity that provides insurance services to the parent company, but comes with its own set of administrative and overhead costs.

These costs can include additional personnel and startup costs, as well as complex compliance issues. As a result, corporations often rely on traditional insurers to insure against some risks, and use reinsurance companies to distribute some of the risk.

Captive insurance companies are often formed to supplement commercial insurance, allowing the parent company to keep the money it would otherwise spend on additional insurance premiums. This can be a cost-effective solution for companies with unique risk profiles.

Some of the key benefits of captive insurance companies include:

These benefits can be especially appealing to companies that want to customize their insurance policies to fit their unique needs. By forming a captive insurance company, companies can take control of their insurance costs and create a more stable and predictable financial future.

The tax concept of a captive health insurance company is relatively simple, but it's not entirely straightforward. The parent company pays insurance premiums to its captive insurance company and seeks to deduct these premiums in its home country.

Suggestion: Can I Deduct Life Insurance Premiums as a Business Expense

In the United States, the Internal Revenue Service (IRS) requires risk distribution and risk shifting to be present for a transaction to fall into the category of insurance. This is a crucial requirement for a captive health insurance company to be considered legitimate.

The IRS has publicly declared it would take action against captive insurance companies suspected of abusive tax evasion, so it's essential to ensure your captive health insurance company is operating within the law. Some risks could result in substantial expenses for the captive insurance company, potentially leading to bankruptcy.

In Ohio, captive insurance companies are not required to join a rating organization, but tax considerations should not be the primary reason for establishing a captive.

Additional reading: Key Man Life Insurance Tax Treatment

In the United States, the Internal Revenue Service (IRS) requires risk distribution and risk shifting to be present for a transaction to fall into the category of insurance.

The IRS has publicly declared it would take action against captive insurance companies suspected of abusive tax evasion.

Several U.S. states allow the formation of captive companies, providing protection from tax assessment for the parent company.

The premium paid to a captive insurance company may be deductible if it involves an insurable risk with both risk shifting and risk distribution.

Ohio Revised Code section 3964.20 and 3913.40 provide more information on this topic.

Captive insurance companies are not required to join a rating organization.

The fee for captive insurance companies in Ohio is calculated at 0.35 percent on direct premiums and 0.15 percent on revenue from assumed reinsurance premiums.

The annual minimum fee or tax for Ohio captives is $7,500, while the maximum is $250,000.

For your interest: Benefits of a Captive Insurance Company

With captives, you have greater access to real-time data, which is a game-changer for risk management. This includes claims data, medical diagnoses, provider usage, and types of service, all of which can be used to inform your risk management policies and controls.

Having this level of transparency allows you to unbundle components of a premium, making it easier to understand pricing and rates. This, in turn, enables you to make more informed decisions about your captive's performance.

By leveraging this data, you can create targeted risk management policies and controls that improve your captive's performance.

For more insights, see: About Indemnity Health Insurance Policies

Captive health insurance companies can offer a range of benefits, but it's essential to consider the potential drawbacks as well.

One of the main advantages of captive health insurance is the potential for cost savings. By forming a captive, companies can tailor their coverage and deductibles to meet their specific needs, which can lead to reduced premiums.

Another benefit of captive health insurance is the tax advantages it can provide. Companies can deduct the insurance premium paid to their captive from their taxable income, which can help reduce their tax liability.

Captive health insurance also offers greater control over coverage and claims. This can be particularly beneficial for companies with unique risk profiles or specific needs that aren't met by traditional group health insurance plans.

Underwriting profits are another potential benefit of captive health insurance. By underwriting their own risks, companies can keep a portion of the premiums they collect, which can provide a source of revenue.

Consider reading: Commercial Property Insurance Coverage Questions

However, there are also some potential downsides to consider. Company capital is at risk with a captive, which means that if a company experiences a high number of claims, they could lose their capital.

Additionally, captive health insurance can come with overhead expenses and startup costs. These costs can be significant, especially for smaller companies.

Another potential con is the potential to be underinsured. If a company doesn't properly assess their risks and set aside sufficient capital, they may not have enough coverage in the event of a claim.

Here are some of the key pros and cons of captive health insurance in a concise format:

Reducing costs and improving control are two of the most significant benefits of captive health insurance companies. By tailoring a policy to your specific needs, you can access coverage that might otherwise be unavailable or too expensive to obtain.

A traditional insurance plan is often too generalized and may not provide coverage options for risks your business may require. This can include loss of reputational value, failure of operational resilience, and business interruption following a cyber event.

Explore further: Can Health Insurance Companies Deny Coverage

With a captive self-insured plan, your performance determines the cost of your plan. You can reduce your company's healthcare spend in three tangible ways: reduced fixed costs, underwriting gains, and investment income.

Here are some key benefits of captive self-insured plans:

Reduced costs are a major benefit of captive self-insured plans. With a captive solution, your fixed costs will drop if you maintain a strong claims history.

One of the ways this happens is through reduced fixed costs. Even if you have low claims, there's no benefit with a traditional, fully-insured plan. This isn't the case with a captive solution.

Underwriting gains are another way captive self-insured plans can reduce costs. Premiums are pooled annually to be retained or distributed. If a company can effectively control its losses, it'll enjoy underwriting profits.

Investment income is also a potential cost-saver. In addition to increasing cash flow, captives can earn investment income on loss and unearned premium reserves.

Here are the three tangible ways captive health insurance enables businesses to reduce their company's healthcare spend:

Traditional insurance plans often fall short in providing coverage for unique business risks. This is because they're designed for the average person, not the individual business.

As a result, many businesses may find themselves without adequate protection for risks such as loss of reputational value, failure of operational resilience, and business interruption following a cyber event.

A captive insurance plan can help bridge this gap, allowing self-insureds to tailor a policy to their specific needs. This can be especially beneficial for businesses that require coverage options that might otherwise be unavailable or too expensive to obtain.

By having more control over their insurance, businesses can better manage their risks and reduce their overall costs.